Monday, October 20, 2008

Adjusting to the new economy - Hiring and Firing

The whole financial turmoil stemming from Wall Street is starting to trickle all the way to Silicon Valley, and it's no secret that startups react to the "new" economy. I might as well say a few things about some of the overreactions of several companies - layoffs.

For large companies like eBay, MySpace, XM Sirius, etc., hiring process became just so complicated to the point where handpicking the "A" team is a real challenge, if not possible. I get that, and a bad economy is a legitimate and good excuse to lay off underperformers. Even in a good economy, the "bottom 10% rule" should always apply. It's just that the market views the layoffs in bad economy as a bad sign, although it may not be necessarily true.

Now... the startup economy's behavior. How many times have we heard in venture community picking the very brightest and dedicated people should always be the top priority? Have we not learned the disastrous consequence of "growing too fast" during the dot com days? The rise of venture financing after the market correction period of 2000-2003 created the invisible (and imperceivable) bubble in the tech industry. The rising availability of capital at hand and appetite for growing too fast without having a fundamental business model slowly crept into the venture community. The consequence - layoffs.

Startups go after different HR strategies. Different school of thoughts....

(1) Let's find the smartest people, and we'll figure out what to do with them! The philosophy is to vacuum smart folks with the belief that they can perform any jobs within the company.

(2) Let's hoard cash and put anyone through a grueling hiring process to ensure that the person can perform the job effectively. Basically, carefully assess the resource needs and be very very picky in choosing the right person to do the job. This is usually very difficult for startups since the resource needs cannot accurately be forecasted and the time to fill the position is not as easy as big, successful firms. This strategy also leads to hoarding cash until that cash MUST be spent for MUST-HAVE reasons. Nice.. but very difficult strategy.

(3) Let's grow as fast as possible. Yes, most of the venture-backed startups should follow this strategy.. with caveat. Growing too fast often leads to overstaffing, and the firm becomes a "B" team magnet. When the bad time hits, the company overreacts to the slightest changes to the plan.

It just seems that some startups didn't learn the lesson from the 90s and followed the (3) strategy. They should've realized that prudent HR strategy should ALWAYS have been in place to expect all unexpected. Some companies even came up with lame reason that the economy was an excuse to lay off underperformers. What they really should've done during the good times was to realize that the economy is cyclical (as always) and layoff should be the very very last resort to cut costs. What they are saying is essentially that they hired unnecessary people during the good times and wasted cash.

After all, nobody knew how the economy was going to turn out. What the startup economy should realize.. again ... is that HR strategy deserves more attention. If we haven't learned anything from dot com era of 1990s and credit crisis of 2008, we really should be doing something else.